The 'Captive Upsell' Business Model

The 'Captive Upsell' Business ModelI was reading Free: The Future of a Radical Price by Chris Anderson the other day, and it got me thinking about other innovative business models. One of the best that I have encountered recently was at the Bridgestone tire store when I got new tires for my car.

What was so impressive was how they convince you to purchase an alignment while they are mounting your new tires. While your car is being worked on, they come out with a computer generated report that shows the misalignment of each of your tires, and offer to do the alignment for an additional fee. It is a very compelling sales pitch:

  1. The computer generated report provides reliable evidence that your tires are misaligned, instead of just looking at the wear on your tires (a computer can’t lie, right?).
  2. To some extent, you have already experienced the problem that they are selling you a solution for – the reason you are there in the first place is for new tires, and misalignment wears tires out faster. The alignment is offering you a chance to extend the life of your tires, and you are most receptive to that sale when you are about to pay for your new tires.
  3. Since your car is already up on the jacks, you believe – rightly or wrongly – that doing the alignment will be cheaper now than if you want to do it later. You’ve already paid, via your new tires, for the labor to get the car on and off the jacks.
  4. You expect (and they verify) that it will only take a few additional minutes to do the alignment, since again it is already on the jacks. Deciding to get an alignment later will most certainly take more time.
  5. You are already spending many hundreds of dollars on new tires, so the alignment seems inexpensive in comparison.

This honestly is an impressive sales technique. The manager that I worked with was personable and not at all pushy – he didn’t have to be, he had all of the above factors in his favor. I bought the alignment – I wouldn’t say I “happily” bought it, but I didn’t leave there with a negative experience even though I spent more on the trip than I intended to.

It is interesting to compare this to a somewhat similar sales technique – an electronics store trying to sell you the extended warranty on your new technology purchase. How does that situation compare to the five factors above?

  1. Reliable evidence? Not really. TVs, stereos, cameras, DVD players – they aren’t known for their poor quality.
  2. Already experienced the problem? Probably not. Odds are you are buying a new toy not to replace a broken one, but because you are upgrading (DVD to Blu-ray) or because you have a new need (like a bigger house).
  3. Cheaper now? Yes. You can only buy the extended warranty at or soon after your purchase.
  4. Only take a few minutes? Yes.
  5. Inexpensive in comparison? Yes (usually).

So three “Yes” and two “No” answers. But those two “No’s” are important – without reliable evidence you don’t believe your new purchase is going to break, especially if you haven’t had one break before.

The lack of evidence is also supported by countless stories you’ve read of how extended warranties are a rip-off. Perhaps if they lowered the warranty price then it wouldn’t be considered a rip-off anymore – but then again, they have likely maximized the price that consumers would consider “acceptable” to maximize their revenues. If they lowered the price it probably wouldn’t gain any new consumers, so they would be just giving away revenues.

There is one other problem with the extended warranty purchase – there is no “immediate gratification”. The warranty payment is for something that might happen in the future. It doesn’t make me enjoy my new TV or DVD player any more now. This reminds me of one more experience – buying my first big screen TV at Best Buy, and the salesperson talking me into an overpriced Monster surge protector. I bought it – partly for its insurance policy, and partly for the supposed immediate improvement in having a “cleaner electrical signal to the TV”. I know, I know… but how did that experience stack up against our five factors above (plus our new sixth “immediate gratification” factor)?

  1. Reliable evidence? Not for the “cleaner signal”
  2. Already experienced the problem? Not for the cleaner signal either, but I did have a relative lose their electronics from a lightning strike.
  3. Cheaper now? Not really, I could buy it at any time.
  4. Only take a few minutes? Yes.
  5. Inexpensive in comparison? Yes.
  6. Immediate gratification? Yes.

When I think back to why I chose the surge protector and not the extended warranty, I think it was a combination of (1) from every news story I heard I knew the warranty was overpriced; and (2) since the surge protector served a dual role – part product improvement, part insurance policy, I was able to more easily justify the high price since it was still much less expensive relative to the TV itself.

I know that I didn’t need a Monster surge protector, but I wonder how many other people have gone through the same thought process, and what other similar sales cases we could apply these factors?

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Rocco TarasiRocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur.

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